Creating A Line Of Credit With Friends: The New Trend In Finance

August 9, 2013

Creating A Line Of Credit With Friends: The New Trend In Finance

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Big news: Three Ashoka Fellows have created the first do-it-yourself credit creation app.

The most recent financial crisis, caused by low-quality sub-prime loans, has left people with no income, no jobs and no assets. It has has been remarkably painful for many. But this market collapse is just another in a long line of banking crises. The famous historian Niall Ferguson, in his book “The Ascent of Money,” shows how in less than a century there have been more than 180 major financial crises—crises that have negatively affected GDP, on average, by at least 10 percent.

Microfinance was once seen as the “human side of banking,” a way for the formal financial system to present itself to an increasingly distrustful public as a fresh-faced maiden. However, this young Cinderella has been the subject to criticism. Microfinance founder and founding member of Ashoka’s Global AcademyMuhammad Yunus has strongly protested against the way microfinance has evolved—many microfinance institutions have become the same money sharks that Yunus initially sought to put out of business.

Today the root problem in the global financial system looks more structural than cyclical—and more endemic and dangerous than simple spring flu.

People are tired of paying high interest rates for credit cards, banks and payday loans. They’re tired of being classified with credit scores that do not necessarily represent their real credit capacity. They’re tired of filing stacks of forms to qualify for small loans. People are looking for new alternatives.

Enter Puddle.

Puddle gives everyday people the opportunity to own a small virtual “bank” with their friends—no fees and no applications. Users decide on interest rates, who can be members, and who can borrow money. The best part: profits made from the interest rates paid by borrowers are distributed among group members.

Raydán, Rodriguez-Ferrera and Flannery are supporting the “self-financed movement,” inspired by ancient lending practices generically known as Rotating Savings and Credit Associations (ROSCAS). Community groups around the world, though very poor, have proven their capacity to organize and sustain their own savings and credit system without having to go through the formal banking system.

Puddle is bringing simplicity, convenience and transparency to a financial model that needs to be changed. It is not intended to replace formal banking. It’s just an alternative for millions of normal people to use modern social networks to support each other financially. And social lending has been proven to actually work. A new study by the University of San Franciscosuggests that lending circles are a proven tool for credit improvement and can help to drastically reduce outstanding debt.

Steve Jobs said that he created the iPhone because he did not like the phone he had. So if you don’t like the service you are receiving from traditional banks or credit cards—because of, say, high interest rates or hidden fees—why not join Puddle and create your own line of credit with some of your friends?

Puddle launched late last year and is expanding rapidly. One example is the Ashoka Puddle that has already gathered 52 members among Fellows and staff and collected over $12,000 in capital. Some Ashoka Fellows are using it as a source to finance some cash flow problems.